Accounting and Reporting for Not-for-Profit Organizations

Case Study 9

Functional Expenses and Allocation of Costs

Learning objectives

• Identify factors to consider in allocating costs of a joint activity to fundraising activities and the appropriate program or management and general function.
• Identify the purpose, audience, and content criteria for allocating joint costs to activities and fundraising activities.

Background

For the most part, there are few differences between the treatment of expenses, gains, and losses of not-for-profits (NFPs) and commercial entities. NFPs present a statement of activities that presents expenses as decreases in net assets without donor restrictions. All NFPs are required to report their expenses by their nature and function in one location to assist users in assessing how NFPs use their resources. Functional expenses can be presented on the face of the statement of activities, as a separate statement, or disclosed in the notes to the financial statements. Because there are overlapping categories for certain items, reporting information by functional classification may require allocation of costs that benefit two or more functions. For example, the executive director of an NFP may spend some of his or her time on fundraising, as well as on general management functions. Often, they would also be involved in the program work. Therefore, their salary would need to be allocated among these buckets.

FASB Accounting Standards Codification^® (ASC) defines fundraising costs as “as activities undertaken ...